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Melcher v. Apollo Medical Fund Management L.L.C.

Supreme Court of New York, First Department

January 29, 2013

James L. Melcher, Plaintiff-Appellant,
v.
Apollo Medical Fund Management L.L.C., et al., Defendants-Respondents. Index No. 604047/03

Plaintiff appeals from the judgment of the Supreme Court, New York County (Melvin L. Schweitzer, J.), entered February 2, 2010, after a jury trial, to the extent appealed from as limited by the briefs, dismissing the causes of action for breach of contract, improper removal, and money had and received, and bringing up for review an order, same court (Donna M. Mills, J.), entered September 8, 2009, which denied his motion to strike defendants' pleadings and to set aside the verdict on equitable estoppel, and from the aforesaid order.

Patterson Belknap Webb & Tyler, LLP, New York (Stephen P. Younger, Sarah E. Zgliniec and Anthony C. DeCinque of counsel), and Jeffrey A. Jannuzzo, New York, for appellant.

Windels Marx Lane & Mittendorf, LLP, New York (Scott R. Matthews and James Tracy of counsel), for respondents.

Luis A. Gonzalez, P.J., John W. Sweeny, Jr., Karla Moskowitz, Dianne T. Renwick, Rosalyn H. Richter, JJ.

RICHTER, J.

In 1995, defendant Brandon Fradd formed Apollo Medical Partners (Apollo Partners), a hedge fund that invests in companies in the biotechnology and medical device industries. Fradd also formed defendant Apollo Medical Fund Management L.L.C. (Apollo Management) to manage the investor money on behalf of the hedge fund. Although Apollo Partners was profitable at first, in late 1997, it suffered significant losses and withdrawal of investors. As a result, Fradd decided it would be beneficial to partner with someone who had expertise in technical analysis of the stock market. A mutual friend introduced Fradd to plaintiff James L. Melcher, an investment manager who had more than 30 years of experience on Wall Street. At the time, Melcher was the sole shareholder and president of Balestra Capital, which managed two hedge funds with $50-$60 million in assets. After some initial meetings, Fradd asked Melcher to become his business partner, and Melcher agreed.

By operating agreement dated January 8, 1998, Fradd and Melcher became managers and members of Apollo Management [1]. The operating agreement set forth a formula for dividing net profits between Fradd and Melcher. Melcher and Fradd would equally share the net profits realized from new investment assets brought into the fund after Melcher became a member. This equal division of net profits would be made regardless of whether Melcher or Fradd introduced the new assets into the fund.

In fact, the allocation of net profits was made in a manner contrary to the terms of the operating agreement. Unbeknownst to Melcher, Fradd instructed Apollo Partners' accountants to use a completely different formula to divide the net profits. According to Fradd, this new formula was memorialized in a May 21, 1998 amendment to the operating agreement (the May 1998 amendment). Pursuant to this purported amendment, Melcher was credited with 50% of the net profits from only those new assets that he himself brought into the fund; he was not paid any portion of net profits based on new assets Fradd brought in. Thus, under the revised methodology, Melcher ended up receiving a lesser share of the net profits than he was entitled to under the operating agreement.

At the end of each year, the accountants split the net profits using the revised formula Fradd had given them. According to Melcher, he complained to Fradd in January 2001, and met with Fradd over the next two years in an effort to resolve the matter. Fradd contends that no such meetings took place, and that Melcher never protested the division of net profits. On October 27, 2003, Fradd removed Melcher as a member of Apollo Management based on a provision in the operating agreement allowing Fradd to unilaterally discharge a member upon 10 days written notice.

In December 2003, Melcher commenced this action against Apollo Management and Fradd. The second amended complaint, as relevant here, asserted causes of action alleging that (I) Apollo Management breached the operating agreement by not paying Melcher his proper share of the net profits (breach of contract); (ii) Fradd was unjustly enriched by receiving part of Melcher's share of the net profits (money had and received); and (iii) Fradd lacked the authority to remove Melcher as a member of Apollo Management (improper removal).

Defendants answered and asserted several affirmative defenses. In their first affirmative defense, defendants maintained that Melcher was estopped from asserting the breach of contract claim as a result of the purported May 1998 amendment. Defendants claimed that Melcher had been paid his share of net profits in accordance with the formula set forth in the amendment, that he had received financial statements and K-1 forms reflecting those net profits, and that he had never protested or complained about the allocation of profits. Defendants' second affirmative defense asserted that this same conduct by Melcher resulted in a waiver of the breach of contract claim.

One of the central issues in this litigation is whether or not the May 1998 amendment is genuine. If, as Fradd claims, the operating agreement was amended, then Melcher was paid his proper share of the net profits. If, on the other hand, there was no amendment, then Melcher was underpaid. Fradd maintains that in the spring of 1998, he and Melcher orally agreed to amend the operating agreement to reflect the revised allocation of net profits. According to Fradd, he asked Apollo Management's law firm to prepare an amendment to the operating agreement reflecting the change. Fradd claims that the law firm prepared the amendment and that he signed it on May 21, 1998. [2]

Melcher denied having orally agreed to changes to the operating agreement and disclaimed any knowledge of the May 1998 amendment. According to Melcher, the first time he heard of the supposed amendment was in December 2003 when Fradd faxed it to him. Believing the amendment had been fabricated and backdated, Melcher's counsel asked defense counsel to make the original document available for forensic ink testing to determine whether, as Fradd claimed, it was signed in May 1998.

In response, Fradd produced a document that was missing the first page and that had been scorched over the signature line. Fradd claimed that the day after Melcher's counsel requested production of the amendment, he accidentally burned the original document while making tea. According to Fradd, he placed the document near the kettle in his kitchen, answered the door, and returned to find that the paper had ignited from his gas stove flame. Fradd ...


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